House passes legislation prohibiting patents on tax planning methods

Sep 13th 2007

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The House of Representatives passed major reforms last week in the form of amending the Patent Reform Act. Hailed as the most significant change to the U.S. patent system in 50 years, the bill still faces an uphill climb as the Senate is working on its own version of patent legislation, and President Bush is seen as being lukewarm on the bill.

Of most interest to accountants is one provision of the bill that prohibits patents on tax planning methods. The bill defines "tax planning method" to mean, "a plan, strategy, technique, or scheme that is designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing, or deferring, a taxpayer's tax liability, but does not include the use of tax preparation software or other tools used solely to perform or model mathematical calculations or prepare tax or information returns."

The American Institute of Certified Public Accountants (AICPA) has supported this ban and has expressed its satisfaction that this measure was included in the House legislation.

"The accounting profession appreciates the House's swift action to protect taxpayers and tax practitioners from the growing problems presented by the granting of tax strategy patents," said Barry C. Melancon, AICPA President and CEO.

Melancon noted that 60 tax strategy patents have already been granted and that 99 more are pending. “The patents are not limited to esoteric sections of the tax code,” he said. "They cover a broad array of areas, including estate and gift taxes and pension plans that affect millions of taxpayers."

"Our underlying concern with tax strategy patents," he said, "is that they violate the core principle of equity that is the foundation of our voluntary tax system."

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The National Society of Accountants weighed in with their praise of the bill as well, and has urged the Senate to follow suit. In a committee report on the bill, the House explained, "Tax strategy patents remove from the public domain particular ways to satisfy a taxpayer's legal obligations. Those methods cannot be practiced by the taxpayer without permission of the patent holder. This will have adverse consequences for both the tax payers and tax advisers who may face patent infringement suits for using patented tax strategies. This undermines public confidence in law and uniformity in tax policies."

The committee report also cautioned that allowing patents "is also likely to increase public dissatisfaction with tax laws if compliance must be accompanied by patent searches and licensing," a point that was reinforced by NSA President Andrew Morehead.

"Conducting patent searches every time we advise clients on tax matters is neither reasonable nor practical," Morehead declared. "The tax code is complicated enough without requiring this extra layer of work and expense." Morehead added that all taxpayers should be able to reduce their taxes in ways allowed by the law without worrying whether an otherwise legal deduction is in violation of a patent.

The House committee report noted that 60 tax strategy patents currently exist, and 89 applications for patents are pending. Morehead urged the U.S. Senate to act promptly on this issue so that neither taxpayers nor tax preparers must contend with such patents during the next tax return filing season.